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    Foreign Currency Translation

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    prajay birla
    Foreign currency translation is used to convert the financial statements of foreign subsidiaries into the reporting currency of the parent company. There are two main approaches to translation: [1] the single rate method, which uses the exchange rate at the balance sheet date to translate all assets and liabilities, and [2] the multiple rate method, which uses a combination of historical and current exchange rates. The multiple rate method includes the current rate translation method, temporal rate translation method, and monetary-nonmonetary translation method, each using different exchange rates to translate different types of assets and liabilities.

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    Foreign Currency Translation

    Uploaded by

    prajay birla
    72 views2 pages
    Foreign currency translation is used to convert the financial statements of foreign subsidiaries into the reporting currency of the parent company. There are two main approaches to translation: [1] the single rate method, which uses the exchange rate at the balance sheet date to translate all assets and liabilities, and [2] the multiple rate method, which uses a combination of historical and current exchange rates. The multiple rate method includes the current rate translation method, temporal rate translation method, and monetary-nonmonetary translation method, each using different exchange rates to translate different types of assets and liabilities.

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    IFM Intro

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    Foreign currency translation is used to convert the financial statements of foreign subsidiaries into the reporting currency of the parent company. There are two main approaches to translation: [1] the single rate method, which uses the exchange rate at the balance sheet date to translate all assets and liabilities, and [2] the multiple rate method, which uses a combination of historical and current exchange rates. The multiple rate method includes the current rate translation method, temporal rate translation method, and monetary-nonmonetary translation method, each using different exchange rates to translate different types of assets and liabilities.

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    72 views2 pages

    Foreign Currency Translation

    Uploaded by

    prajay birla
    Foreign currency translation is used to convert the financial statements of foreign subsidiaries into the reporting currency of the parent company. There are two main approaches to translation: [1] the single rate method, which uses the exchange rate at the balance sheet date to translate all assets and liabilities, and [2] the multiple rate method, which uses a combination of historical and current exchange rates. The multiple rate method includes the current rate translation method, temporal rate translation method, and monetary-nonmonetary translation method, each using different exchange rates to translate different types of assets and liabilities.

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    of 2

    INTRODUCTION

    Foreign currency translation

    Foreign currency translation is used to convert the results of a parent company's foreign
    subsidiaries to its reporting currency. This is a key part of the financial statement consolidation
    process.

    Different Approaches to Translation

    1. Single- rate method/approach - The single or current rate approach treats foreign
    operations as if they existed separately and apart from the parent. Hendiksen (1985) terms
    it as the ‘net investment’ approach wherein; The business of the foreign subsidiary or
    division is viewed as an investment with a return measured by the net income of the
    foreign operation which accrues to the benefit of the parent. That is, in concept, the
    foreign operation is treated as separate entity rather than as a part of the operation of the
    parent. Therefore, all the assets and liabilities should be translated in terms of the
    exchange rate at the date of the balance sheet.

    2. Multiple- rate method/approach - The alternative approach methods available utilize a


    combination of historical and current exchange rates in the translation process. The
    difference lies in the assumption regarding the class of assets and liabilities which are
    affected by variations in exchange rates. The translation methods under this approach are
    there are various sub methods -
     Current Rate Translation Method
    The accounting standards’ methodologies employ the functional currency translation
    approach, which relies on the current rate method when the functional currency is the
    same as the local currency -- for example, a London subsidiary using the British pound.
    In the current rate method, assets and liabilities use the current, or “spot,” exchange rate
    existing on the date of translation -- the date on the balance sheet. The method translates
    equity items excluding retained earnings using the transaction date’s spot rate. Retained
    earnings and income statements use an average of the period’s translation rates, except
    when the foreign operation can identify an appropriate specific rate.
     Temporal Rate Translation Method - The accounting standards call for foreign operations
    to use the temporal, or historical, rate method when the local currency differs from the
    functional one. For example, a subsidiary of a Canadian company with foreign operations
    in a small country in which all business transpires in U.S. dollars, not the country’s local
    currency, would use the temporal method. When you apply the temporal rate method, you
    adjust income-generating assets on the balance sheet and related income statement items
    using historical exchange rates from transaction dates or from the date that the company
    last assessed the fair market value of the account. You recognize this adjustment as
    current earnings. According to FASB Rule 52, you also apply the temporal rate method if
    you operate in a hyperinflationary environment.
     Monetary-Nonmonetary Translation Method -A company uses the monetary-
    nonmonetary translation method when a foreign subsidiary is highly integrated with the
    parent company. The goal is to represent translated amounts as if they arose from exports
    sent from the parent company to the subsidiary’s markets. You translate monetary assets
    and liabilities such as cash, accounts receivable and accounts payable using the current
    exchange rate. You use the historical rate when you translate nonmonetary items such as
    inventory, fixed assets and common stock. For example, you would use the spot rates
    existing at the time you purchased inventory items.

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